S&P affirms Indonesia rating at BB+

At the same time, Standard & Poor's affirmed its recovery rating of 3 on Indonesia's senior unsecured foreign currency debt, which signals our expectation of meaningful recovery of 50%-70% in the event of a default.

"Our transfer and convertibility risk assessment on Indonesia is unchanged at BBB-."

"At the same time, we have detected some policy slippages, after a remarkable decade of entrenching democracy following the collapse of the Suharto administration. The abandonment of a planned electricity tariff rise, the inability to implement fuel subsidy cuts despite rising oil prices, and a host of proposed or actual policy measures in industry and trade, point to rising policy uncertainty."

Such a policy environment puts at risk the recent strength of domestic and foreign investment. In addition, while there are ongoing efforts to improve infrastructure and energy provision, implementation risks remain, Mr. Benard said.

A law that caps the central government fiscal deficit at 3% of GDP supports the government's fiscal management. Indonesia has consistently reported low overall budget deficits averaging 0.4% of GDP annually for the past 10 years, although this is also partly attributable to recurrent under-spending of capital budgets and to some off-budget fiscal activities.

The positive outlook reflects the likelihood of an upgrade if government reforms reinforce fiscal trends, support foreign direct investments, and allow subsidy cuts without reversing recent improvements in inflation. The confluence of these factors would likely lead us to raise our estimates for Indonesia's medium-term growth prospects and, along with that, the rating.

"On the other hand, if the government's subsidy spending alters the fiscal outcome or markedly deteriorates the quality of expenditure or if policy measures deter fresh FDI, then the ratings could stabilize at the current level," Mr. Benard said.